How Democrats and Republicans want to change Social Security, explained in plain language

For most retirees, Social Security is a much-needed financial lifeline that helps make ends meet. For a significant percentage of today’s workforce, this statement will also hold true in retirement.

But when examined as a whole, Social Security can be a complex, confusing, and potentially intimidating program for the American public to try to figure out. I can change that.

Today we are going to break down three complex topics that will be explained in plain language:

  • How America’s Best Retirement Program Got into Financial Trouble.
  • Social Security changes Democrats and Republicans want to make to strengthen the program.
  • Why a resolution of social security problems is a long way off.

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Social Security faces $20.4 trillion cash shortfall

Since 1940, Social Security has provided eligible workers with a monthly retirement benefit. For the vast majority of those years, the program brought in more revenue than it paid out in benefits.

Where does Social Security get its revenue from, you ask? About 90% of the money it brings in comes from the 12.4% payroll tax on wages and salaries. This payroll tax is paid on income earned between $0.01 and $147,000 in 2022, although the upper limit will increase to $160,200 next year.

The remaining 10% of annual income comes from a combination of taxation of Social Security benefits for beneficiaries who earn above certain income thresholds and interest earned on bonds held by Social Security trusts. The excess revenue that Social Security brings in most years over what it pays out in benefits must, by law, be invested in special-issue low-risk government bonds that pay interest. .

The problem for Social Security is that many demographic changes increase payments at a much faster rate than income growth. As a result, Social Security recorded a deficit in 2021. This deficit is expected to increase every year in the future.

These demographic changes include the continued retirement of baby boomers, a slowdown in legal net immigration to the United States, historically low birth rates, lower interest rates (which reduce interest earned on bonds held by social security) and growing income inequality.

According to the 2022 Social Security Board of Directors report, the program projects a cash shortfall of $20.4 trillion between 2022 and 2096. Although this is only an estimate, administrators take into account all the demographic variables described above, as well as cost. lifetime adjustments (COLA) passed on to beneficiaries in most years, so that their payments follow the increase in the price of goods and services (i.e. inflation).

If nothing is done by Washington D.C. lawmakers to bolster Social Security, trustees estimate that a widespread 23% reduction in benefits may be needed by 2034 for the Old-Age and Survivors Insurance Trust (OASI ) can maintain payments without any further reductions until 2096. The AVS is what pays benefits to more than 48 million retired workers and about 5.8 million survivors of deceased workers.

How Democrats and Republicans want to strengthen Social Security

Now that you better understand why Social Security is in dire financial straits, let’s take a look at how lawmakers are proposing to fix the program.

The Democrats’ Proposal

There are only two ways to address an estimated $20.4 trillion cash shortfall: increase incremental revenue or cut costs. Democrats prefer the former.

The Democrats’ main proposal to Congress is to raise payroll taxes for the highest-paid workers. As noted, wages and salaries over $147,000 in 2022 are exempt from payroll tax.

Ahead of his November 2020 election to the Oval Office, Joe Biden proposed a plan that would restore the 12.4% payroll tax on earned income over $400,000. Meanwhile, income between $147,000 and $400,000 would remain exempt from payroll tax. To provide some context, well over $1 trillion in earned income escapes the Social Security payroll tax each year.

The other Social Security proposal proposed by Democrats is to change the way annual cost-of-living adjustments are calculated.

Since 1975, the Consumer Price Index for Urban Wage and Clerical Workers (CPI-W) has been used to determine annual inflation and assign COLAs. Democrats prefer the consumer price index for the elderly (CPI-E). While the CPI-W tracks the spending habits of working-age Americans who typically do not receive Social Security benefits, the CPI-E would specifically track the spending habits of older adults, who make up the bulk of recipients of the program. The end goal here is to increase annual COLAs by using an index that is more representative of the inflation seniors face.

The Republican Proposal

On the other side of the political aisle are Republican lawmakers, who collectively believe that cutting program spending over the long term will strengthen Social Security.

The main change Republicans would like to see implemented is a gradual increase in the full retirement age (FRA). A person’s FRA is the age at which they become eligible to receive 100% of their Social Security retirement benefits. For anyone born in 1960 or later, their FRA is 67.

Taking your benefit before reaching FRA means accepting a permanent lifetime reduction (i.e. not receiving 100% of what you would be owed at FRA) of your monthly payment. Meanwhile, waiting for the FRA to end can increase your monthly payment by up to 24% to 32%, depending on your year of birth.

What the GOP has proposed is to gradually increase the FRA to 70. If the FRA were increased, workers would either have to wait longer to collect their full retirement pension, or claim sooner and accept payment permanently reduced. Either way, it would ultimately result in a lower lifetime benefit.

The other major change proposed by the Republicans is to move from the CPI-W to what is called the chained index of consumer prices. The chained CPI takes into account the idea of ​​substitution – exchanging for a similar good or service at a lower cost. In other words, if the price of ground beef has risen 60% over the past year, consumers might switch to a cheaper source of protein, such as pork or chicken. Using the chained CPI as an inflationary measure of Social Security would almost certainly lead to lower annual COLAs, which would help reduce the amount the program pays out each year.

A Democrat donkey and a Republican elephant face each other atop an American flag.

Image source: Getty Images.

Here’s Why a Social Security “Fix” Hasn’t Happened Yet (And Maybe Not For Some Time)

To be clear, Social Security loopholes have never run out of resolutions on Capitol Hill. Nonetheless, Social Security legislation has stalled for decades, with the last major overhaul of the program occurring under President Ronald Reagan in 1983. The reason for this current stalemate is twofold.

To begin with, the Democratic and Republican solutions aim to strengthen social security, which is the main problem. Lawmakers say there is no point in finding common ground with their opposition if they have a solution that would make Social Security more financially sound.

However, both solutions also have their flaws.

For example, the GOP’s proposal to raise the full retirement age would take decades to translate into significant cost savings. As the AVS must exhaust its excess reserves by 2034, this does not benefit the program in the short term.

As for the Democrats’ plan, raising the payroll tax alone will not solve the estimated $20.4 trillion cash shortfall through 2096. Moreover, it can be argued that the well-off are already paying their fair share in social security, since they would not see a penny more in benefits despite the tax increase.

The second reason why a resolution is likely to take several years has to do with the makeup of Congress, particularly the US Senate. To amend Social Security, 60 “yes” votes are needed in the Senate. It has been more than four decades since either party won a 60-seat supermajority in the Senate. That means Democrats would need some form of Republican support, or vice versa, to pass legislation. This was simply not possible, given the ideological distance between the two parties.

If there’s a silver lining here, it’s that lawmakers are used to working together at the 11th hour. This is what happened in 1983, and it could very well happen again as the Social Security AVS approaches the depletion of its heritage reserves. But in the meantime, expect little progress on Social Security legislation despite clear evidence that the program is in dire need of tweaks.

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